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Q1. Which of the following transactions should be included as part of GNP?

(a) A consumer pays £10 for a meal at the restaurant

(b) A company buys a plant from another firm for £1 million.

(c) A supplier sells computer chips to another firm that makes personal computers.

(d) A person buys a second-hand car from a dealer for £5,000.

(e) A person buys a new car for £15,000.

(f) A factory, which produced £2 million worth of PCs each year, closes down.

(a) Yes: the consumer buys a product, increasing the level of output of the economy.

(b) No: this is financial investment. The plant already exists and there is only transfer of capital from one firm to another.

(c) No: only the final value of the personal computer is included in the GNP to avoid double counting (the cost of the chip is part of the computer's final price). On the other hand, using the value added method, we can record in the GNP the value added of producing chips. To avoid double counting, only the value added of the personal computer (the final good) will be successively recorded in the GNP.

(d) No: Only the value added of this transaction is recorded in the GNP.

(e) Yes: the consumer buys a product, increasing the level of output of the economy.

(f) Yes: this is recorded with a negative sign equal to the value added previously produced by the firm.

Q2. A person saves £10,000 of this year's income and spends it on new machinery. Explain how this would be recorded in the national accounts. Another person takes £10,000 from under the mattress and buys shares in a British company. Would this be recorded in GNP?

The first decision is new investment and will be recorded in GNP.  Investment will increase by £10,000 and so will saving.  The second decision is only financial investment.  That person is not investing in real terms; s/he is only buying capital that already exists.  It is what national income statisticians call a transfer payment; therefore this transaction is not recorded in GNP.

Q3. Consider an economy with only three goods. Their market prices are P1 = 5, P2 = 10 and P3 = 15. The production (and consumption) of each good during 1995 was Q1 = 20, Q2 = 25 and Q3­ = 10.

(a) What is the value of nominal GNP?

(b) Assume that in 1996 prices rise to P1 = 6, P2 = 12 and P3 = 17, and quantities produced (and consumed) go to Q1 = 21, Q2 = 27 and Q3 = 11. Calculate the value of nominal GNP. Compute real GNP, using 1995 prices as the base year. What is the rate of inflation? What is the real rate of growth of the economy?

GNP95 = P1Q1 + P2Q2 + P3Q3 = (5 x 20) + (10 x 25) + (15 x 10) = 100 + 250 + 150 = 500

GNP96 = P1Q1 + P2Q2 + P3Q3 = (6 x 21) + (12 x 27) + (17 x 11) = 126 + 324 + 187 = 637

real GNP96 is calculated using 1995 prices and 1996 quantities.

31/07/97

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